City Manager Dan Keen gave a gloomy financial forecast, saying the outlook is bleak amid financial turmoil and plummeting home sales.

Real estate tax revenue that fuels city coffers has been curbed by declining home sales. In addition, Novato has posted the most properties in various states of foreclosure trouble in Marin. Novato also tops the list of homeowners asking the county to reduce property taxes in light of declining real estate values.

Keen said a nearly 6 percent drop in sales tax revenue from last year is among a number of Novato’s growing budget woes, adding the city will close the 2007-08 fiscal year in July with a deficit of more than $1 million.

Estimates from staff indicate that deficit could grow to $4 million by 2011-12.

“That deficit is significant, but it’s not going to kill us,” Keen said to an audience of about 50 people gathered at the Hilltop Cafe for a “state of the city” forum sponsored by the Novato Chamber of Commerce. “What’s alarming is the signs for the future.

“Looking forward, we see some very dark clouds.”

The city budget crunch is not directly related to Novato’s strong retail business, said Keen, but the fortunes of the two soon will be tied closely. Plans to renovate the Mall at Northgate in San Rafael and create almost 3 million square feet of retail shopping in Petaluma could draw significant sales tax money out of Novato, he said.

Novato
is expected to begin planning its own major retail renovations in the north Redwood Highway area this fall.

“I don’t think the business community realizes the effect these new shopping options could have on Novato,” Novato Chamber of Commerce chief Coy Smith said. If San Rafael and Petaluma “continue to move forward quickly and we don’t, it could be an issue.”

Novato officials had projected about $6.4 million in sales tax revenue this year, which they hoped would balance out the slowdown in property tax revenue. Instead, sales tax revenue fell to $5.9 million, while secured property taxes merely met expectations. A loss of $500,000 in property transfer taxes leaves Novato operating at a deficit.

City officials are projecting $5.9 million in sales tax revenue again next year, but Keen said another dip is possible.

The Redwood Highway corridor has been discussed as an area ripe for development. Keen said the area could provide a huge boost to the city’s sales tax revenue.

“Whatever comes here, whether it’s housing, retail or both, (residents) need to agree on what we want to see here,” Keen said.

“I think what’s going on in the economy right now is going to affect businesses more than the city budget,” Smith said. “Any businesses we know of right now that are struggling (are) directly related to the economy. That affects sales tax for the city, but it’s a much bigger problem for the businesses themselves.”

Despite the gloomy outlook, Keen did note progress in the city’s development projects. The new Whole Foods Market downtown is set to open within the year, and Hamilton Marketplace construction will take less than a year to finish.

The Costco at Vintage Oaks has almost finished its renovation at a cost the company usually spends to construct new stores from the ground up.

Two long-vacant buildings in the heart of downtown – a former office building at 999 Grant Ave. on the corner of Redwood Boulevard, and the old Pini Hardware site at Grant and Second Street – have both been sold, and plans involving new tenants are in the works. The building at 999 Grant will be razed to make way for a new retail store.